Yeah, seeing this topic has been coming up A LOT lately, it's certainly been informative to learn what the flagging system is designed to do and I agree with it whole-heartedly in principal. That said, as a very small fish the fact that you stand a good chance of getting your content squashed just for excercising that option means that the majority of minnows are never going to flag anything so the system doesn't really get integrated at the lower levels.
Hence the whole freak out when it actually starts being used. For the time being I guess it remains a way for bigger players to 'voice their displeasure'